Loan repayment protection programs help you repay your education loans if you experience financial hardship. Both federal and private loan repayment protection programs are available, including the income-based repayment plan, economic hardship deferment, forbearances and SafeStart. (See also tuition refund insurance.)

Federal Programs

There are several federal programs that provide repayment relief for borrowers who are having trouble repaying their student loans.

• The income-based repayment plan bases your monthly payments on a percentage of your discretionary income instead of the amount you owe. It is especially useful for borrowers whose debt-to-income ratio for their federal education loans is 1.5 or more, but even low-income borrowers who have debt that is about the same as their income will benefit. Most borrowers will have a monthly debt burden that is less than 10% of their adjusted gross income under the income-based repayment plan. Moreover, if your income is less than 150% of the poverty line you monthly payment is zero. Unfortunately, income-based repayment is available only for federal loans, not private student loans.

• The economic hardship deferment allows borrowers to suspend payments on federal education loans in one-year increments for up to three years. Interest on subsidized Stafford loans (and the portion of a consolidation loan that repaid a subsidized Stafford loan) is paid by the federal government during the deferment. Interest on unsubsidized loans, however, continues to accrue and is capitalized, causing the loan balance to grow.

• A forbearance is like a deferment, in that it allows borrowers to suspend payments on their education loans, but interest accrues on all loans including subsidized loans. Forbearances on federal education loans are granted in one year increments for up to five years. Forbearances on private student loans are granted in three month increments for up to a year. There are no fees for forbearances on federal education loans, but some lenders may charge fees for forbearances on private student loans.

SafeStart from BridgeSpan Financial LLC

SafeStart provides an interest-free line of credit that borrowers can use to make up to 12 quarterly "draws" during the first five years after graduation. Each draw covers three monthly payments on the borrower's student loans, for a total of 36 months of coverage. Draws are paid directly to the lenders that hold the loans. The draws are repaid interest-free over a five year repayment term. (Draws can also be repaid during the draw period and will restore the line of credit.) The required payment is $20 or 1/60th of the total draw, whichever is greater, until the total draw is paid in full. There is no prepayment penalty on the draws, so borrowers can repay the draws quicker if they wish.

In order to obtain this "financial hardship protection", however, borrowers must pay an up-front commitment fee of 4% to 9% of the loan amount when the loan is borrowed. (The commitment fee may be paid in 12 monthly installments starting when the loan is disbursed.) The commitment fee depends on the college, the amount of coverage and the counseling services elected by the student. The fee does not vary by year in school or field of study. Since the pricing will be the same for all students at a school, students who are majoring in fields or pursuing degrees that are less employable may derive a greater financial benefit from the program.

Financial hardship protection is only available to SafeStart customers after they have graduated. Borrowers who drop out without graduating are not eligible. Borrowers must also be able to demonstrate financial hardship in order to draw on the line of credit. Financial hardship is defined as either unemployment or having total monthly student loan payments that are greater than 10% of gross monthly income.

Coverage is currently limited to undergraduate Stafford loans, but will be expanded to include undergraduate and graduate student loans (including Stafford, Grad PLUS, Perkins and private student loans). Protection can be obtained for 25%, 50%, 75% or 100% of the loan balance with a corresponding adjustment to the commitment fee.

The SafeStart program parallels many aspects of the federal loan programs. If the school closes before the borrower graduates or the loan is cancelled, the commitment fee will be refunded without penalty. If the borrower receives a death or total and permanent disability discharge on their student loans, the repayment obligation on corresponding draws will be cancelled.

The company says that the financial hardship protection will save borrowers money by avoiding the capitalization of interest that occurs with the federal programs and by avoiding any extension of the repayment term. (The SafeStart program is intended to allow borrowers to stick with a standard 10-year repayment term, but can be used in conjunction with alternate repayment plans. The shorter the repayment term, the less interest that will be paid over the lifetime of the loan.)

The SafeStart program also includes financial literacy training to borrowers while they are in school and debt management counseling after they graduate. To the extent that this proactive counseling is effective it will save the company money, so they have a strong financial incentive to improve the effectiveness of the training and counseling programs.

One of the main benefits of the SafeStart program is that it provides students with peace of mind. Many students worry about their ability to repay their student loans or get a job after they graduate. The SafeStart provides them with an additional safety net (for a fee).

Two types of borrowers should think twice before using SafeStart:

• Students who intend to pursue careers in public service should stick with income-based repayment, as they will save more money with the 10-year forgiveness provided by the public service loan forgiveness program.

• Borrowers who have mostly subsidized Stafford loans should consider whether SafeStart is necessary. Not only does the economic hardship deferment pay the interest on subsidized Stafford loans for three years, but the income-based repayment program provides a similar three-year benefit for subsidized Stafford loans when the borrower's income is less than 150% of the poverty line.

Performing an accurate cost/benefit analysis of the SafeStart program is complicated because it necessarily involves calculating the net present value and modeling the expected value of the program's benefits. Prospective users of SafeStart are unlikely to consider all of the factors that affect the financial value of the program:

• Only a small percentage of SafeStart users will need to draw on the line of credit (probably 1/6 to 1/3, but the company believes that it will be closer to 1/3 to 1/2).
• About half of students do not graduate and hence will not qualify for the financial hardship protection.
• Most borrowers will not draw down the full 36-month line of credit.
• The commitment fee paid to SafeStart would otherwise have reduced the amount borrowed, thereby increasing the interest paid over the life of the loan.
• The commitment fee is not deductible on federal income tax returns, while up to $2,500 in interest on qualified education loans is deductible as an above-the-line exclusion from income.

Additional financial considerations include:

• Most of the savings from using SafeStart as compared with income-based repayment is due to the difference in repayment terms (10 years versus 25 years). The main financial benefit of SafeStart is as an alternative to forbearance.

• Assuming that an equivalent of about one in six borrowers will draw down the full 36 months, the financial benefit of the zero-interest line of credit is roughly break-even at the 4% fee level. To the extent that a greater percentage of SafeStart borrowers will draw on the line of credit (say, due to adverse selection or a higher delinquency rate at a particular school), the program may be financially break-even at a higher fee level. The SafeStart program appears to be priced at a level that is close to breakeven (or slightly more expensive than breakdeven) from a borrower perspective but still profitable to the company.

To some extent a detailed financial analysis is besides the point. Rather than focusing on the financial tradeoffs, prospective users of SafeStart should consider whether the peace of mind this program provides is worth the cost of the commitment fee.

There are a few other issues that prospective users of SafeStart should consider before enrolling:

• Borrowers who draw on their line of credit will have to repay the line of credit at the same time as they are making payments on their student loans. During the overlap period the size of the monthly loan payments may increase by up to 3/5.

• The most likely use of the SafeStart line of credit will be for a 3 month period when a borrower is between jobs, and the draws will likely be repaid over a 9-12 month period, yielding up to a 1/3 increase in the monthly payment burden when a borrower is repaying the line of credit. SafeStart subscribers are therefore likely to draw on the line of credit as an alternative to the economic hardship deferment, preserving this deferment for use after the five year draw period has ended.

• The SafeStart program currently includes good, better and best plans corresponding to the inclusion of basic financial literacy, in-depth financial literacy and debt management counseling and with higher fees accordingly. The best plan provides for a rebate if the borrower has a zero balance at the end of the draw period, with the net cost after deducting the rebate equal to 98% of the cost of the better plan.

SafeStart was founded in 2009 by Jeff Weinstein and Carlo Salerno. They were lead analysts on postsecondary education when they worked at the US Government Accountability Office (GAO).

For more information about SafeStart, write to BridgeSpan Financial LLC, PO Box 13352, Arlington, VA 22209-3352, call 1-202-449-9616, fax 1-866-492-0537, send email to info@bridge-span.com or visit www.yoursafestart.com.